[BETA] Fortnightly

THE RECENT SLOW-DOWN IN RAIL SHIPMENTS OF WESTERN coal has begun to claim victims in the electric utility industry. One of the largest in recent years, the current fuel "shortage" has hit big investor-owned utilities, small municipalities and co-ops. Increased alternative fuel and replacement purchased power cost utilities more than $150 million in 1997.

Union Pacific rail system is the source of most of the slow-down in western coal deliveries. As the company works to integrate recently acquired Southern Pacific railroad into its operations, it has encountered many difficulties. Creating the largest railroad system in the United States is no easy task.

UP coal car loadings have declined steadily since spring 1997. As of early November, UP loadings were down 25 percent from the first two months of 1997. Plants in the Dallas-Fort Worth to Houston corridor experienced the first major delivery decline due to rail congestion. Now, plants all over the U.S. are feeling the pinch. Collectively UP provides transportation services to more than 75,000 MW of coal-fired generation.

Utilities have responded to the slowdown by cutting back on wholesale power sales from coal units and curtailing coal-fired generation during non-peak hours. Affected coal units are operating at 75 percent of their normal levels; natural gas generation is providing the bulk of the replacement generation.

The converging natural gas and wholesale electric markets have responded to the supply constrictions. Natural gas futures prices at the NYMEX Henry Hub delivery point began climbing from the usual summer price levels of $2.00/mcf as utilities increased their use of gas generation in late summer. Current prices of $3.25/mcf are approximately 50 percent greater than the same time in 1996. If coal deliveries remain constricted through the winter and residential gas demand is high, the record natural gas prices of last winter could seem like a bargain.

Wholesale electricity markets have responded to the move to higher cost generation sources. Peak power prices into the ERCOT and SPP regions have been treading above the $30 per megawatt-hour mark for several months, which is nearly 50 percent greater than comparable 1996 levels.

The converging energy markets have spread to include rail providers. Burlington Northern Santa Fe, the other major western railroad, has responded to those utilities in need that are accessible to BNSF lines with limited additional service at higher rate levels.

This event shows that disruptions in only a relatively small portion of the Btu value chain can have wide ranging impacts across the entire energy industry. Producers and suppliers alike must be aware of related energy market activities and prepare to deal with the increased volatility in those markets that electric utility deregulation will undoubtedly cause. F

Chris Leshock is consultant at Resource Data International Inc.

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